Ares’ real estate debt AUM surpasses $11bn

The strategy is the second-largest in the Los Angeles-based firm’s real assets business after US real estate equity.

Ares Management raised fresh capital for its real estate debt business in the third quarter of the year, taking its total assets under management for the strategy to over $11 billion.

“Within real assets, we raised more than $500 million in a European real estate debt mandate, which now totals over $1 billion, and we anticipate that this strategy will continue to grow,” chief executive Michael Arougheti said during the Los Angeles-based firm’s third-quarter earnings call.

“Our real estate debt business now exceeds $11 billion, and we believe the team is well positioned for further growth due to investor demand and the current acute need for capital in the industry.”

As of 30 September, 2023, Ares’ real assets AUM totalled $63.9 billion, of which its US real estate equity strategy represented $29 billion, or 45 percent. Real estate debt’s share was the second largest, accounting for 17 percent of real assets AUM, followed by European real estate equity and infrastructure strategies.

Within the US real estate equity strategy, the firm is currently in the market raising capital for Ares Real Estate Opportunity Fund IV, which was launched in October 2022 with a $3 billion fundraising target, as affiliate title PERE previously reported. Arougheti said during the call that the firm expects to have an additional closing for the vehicle by year-end.

Ares Management’s leadership has been vocal about the investment opportunities emerging in commercial real estate debt and opportunistic equity due to the consolidation in the regional US banking sector. In response to a question on what the firm is doing to capture this market opportunity, Arougheti said the firm already has a well-developed team in the US and Europe, and is also building its capabilities in Asia-Pacific.

“When you think about what is going on in the world of commercial real estate and the change in basis, most of the exciting stuff is going to be happening in the top to middle part of the balance sheet of these entities, and that’s going to be a combination of real estate lending solutions, real estate secondaries and structured equity through our opportunistic real estate business. And obviously, we have large teams against all three of those,” he said.

Despite the scale of the opportunity in commercial real estate, the bigger issue is investor behaviour. “You have a lot of investors that are also playing defence within their existing exposures,” Arougheti explained. “Until they get their heads around what it is that they currently own, I think it’s going to be a little hard for them to get on offense. So, I think for me, it’s really going to be all on the capital side, not the capability side.”

Speaking about the real estate platform’s overall performance during the quarter, Jarrod Phillips, the firm’s chief financial officer, said that higher cap rates are “offsetting the relatively strong rent growth that the firm is seeing in its portfolio, which is heavily weighted towards more resilient industrial and multifamily sectors”.

“This is leading to muted returns for the third quarter, yet due to our significant overweighting in these strongest performing sectors of industrial and multifamily, which account for more than 75 percent of our real estate gross value, our US and European real estate strategies have performed well relative to the respective public real estate markets over the past two years,” he explained.